Oct. 03, 2019 - Chapter 8 of Davies Governance Insights 2019
CSA Does Right by Rights Offerings
On September 24, 2015, the Canadian Securities Administrators (CSA) announced the adoption of a streamlined prospectus-exempt rights offering process, which is aimed at providing reporting issuers with greater access to this prospectus exemption. Rights offerings permit issuers to distribute to their existing securityholders rights to purchase securities, generally at a discount to the prevailing market price. These offerings are often viewed as a fair way to raise capital because they protect existing investors from dilution. The rights offering prospectus exemption has historically not been frequently used in Canada, owing to the time and cost associated with the current regime. Under the new regime, none of the materials provided to securityholders will be reviewed by regulators prior to their use, substantially reducing the time frame in which an issuer can complete a rights offering. The new rights offering prospectus exemption will be available only to reporting issuers (other than investment funds) issuing an existing class of securities.
The process for completing a rights offering under the streamlined new prospectus exemption and the required documentation are set out below.
- Prior to the commencement of the exercise period for the rights, the issuer files a rights offering notice on SEDAR and sends it to all securityholders resident in Canada holding the class of securities to be issued on the exercise of the rights. The notice contains only basic information about the offering, such as the size of the offering, the steps required to participate in the offering and how to access the rights offering circular electronically. The CSA does not expect a rights offering notice to be longer than two pages.
- Concurrently with the filing of the rights offering notice, the issuer files a rights offering circular on SEDAR (the issuer is not required to send the circular to securityholders). The rights offering circular includes, in question-and-answer format, limited disclosure regarding the distribution, such as information relating to the particulars of the offering, the sources and uses of funds available after the offering and insider participation in the offering. The issuer must also disclose in the circular any material facts or material changes that have not yet been disclosed and include a statement that there are no undisclosed material facts or materials changes in respect of the issuer. The circular also must be certified not to contain a misrepresentation by the issuer’s CEO, CFO and two of its directors. The CSA does not expect a rights offering circular to be longer than 10 pages.
- The exercise period for the rights must be at least 21 days but not more than 90 days.
- On the closing date of the offering, the issuer must issue and file on SEDAR a news release setting out, among other things, the aggregate proceeds of the distribution and the number of securities issued under the basic subscription privilege, any additional subscription privilege and stand-by commitment.
Under this new rights offering prospectus exemption, the permitted dilution under an exempt rights offering will be increased from the current 25% to 100% in any 12-month period, which should make the exemption more attractive to smaller issuers. Rights offerings that result in greater dilution will have to be conducted by way of a prospectus.
The secondary market liability provisions of Canadian securities laws will apply to offerings under the new rights offering prospectus exemption. As a result, investors will have a statutory right of damages in respect of misrepresentations contained in documents released on behalf of the issuer, any misrepresentations in public oral statements made by certain persons related to the issues and the failure of the issuer to make timely disclosure.
For listed securities, the subscription price under the new rights offering prospectus exemption must be lower than the market price at the time of filing the rights offering notice. For unlisted securities, the subscription price must be lower than the fair value at the time of filing the notice; however, this limitation will not apply if insiders are restricted from increasing their proportionate interest in the issuer through the offering or through a stand-by commitment. Stand-by commitments will be permitted provided that the rights offering features an additional subscription privilege for securityholders and the issuer confirms in the rights offering circular that the stand-by guarantor has the financial means to carry out the commitment. In response to stakeholder comments, the CSA determined not to impose a four-month hold period on securities distributed under the exemption to a stand-by guarantor that was not a securityholder at the commencement of the offering.
We expect that the new rights offering prospectus exemption will be well received by reporting issuers because it should reduce the time and cost associated with rights offerings, thereby making such offerings a more practical means of raising capital. Issuers that are not reporting issuers and that wish to raise capital from existing securityholders will now have to rely on one of the other exemptions available under Canadian provincial securities laws, such as the accredited investor exemption or the private issuer exemption.
The amendments are expected to come into force on December 8, 2015.